UTi's CEO Discusses F2Q2013 Results - Earnings Call Transcript

Sep. 6.12 | About: UTi Worldwide (UTIW)

UTi Worldwide Inc. (NASDAQ:UTIW)

F2Q2013 Results Earnings Call

September 6, 2012 11:00 AM ET

Executives

Jeff Misakian - Vice President, Investor Relations

Eric Kirchner - Chief Executive Officer

Lawrence Samuels - Chief Financial Officer

Ed Feitzinger - Executive Vice President, Contract Logistics and Distribution

Analysts

Ben Hartford - Robert W. Baird

William Greene - Morgan Stanley

Ed Wolfe - Wolfe Trahan

Peter Nesvold - Jefferies & Company

Alex Johnson - J.P. Morgan

Connor Hustava - Stephens

David Ross - Stifel Nicolaus

Nate Brochmann - William Blair & Company

David Campbell - Thompson Davis & Company

Kevin Sterling - BB&T Capital Markets

Todd Fowler - KeyBanc Capital Markets

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the UTi Second Quarter Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, September 6, 2012. I would now like to turn the conference over to Jeff Misakian, Vice President of Investor Relations. Please go ahead, sir.

Jeff Misakian

Thank you, Irene, and good morning, everyone. Welcome to UTi Worldwide’s fiscal 2013 second quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Contract Logistics and Distribution, is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made in today’s call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the company’s actual results to differ materially from those discussed in any forward-looking statements.

These risks and uncertainties are described in further detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces.

UTi undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Now, I would like to turn the call over to Eric Kirchner. Eric?

Eric Kirchner

Thank you, Jeff. Good morning, everyone. Weak macro economic forces weight on the industry throughout the second quarter. Many of the trends seen in the first quarter continued to effect industry performance in the second quarter and our results were no exception.

The uncertain environment and weak consumer demand have made companies increasingly careful in their production and in their freight and logistics spend. Currency translation also had a material impact on our second quarter results as the U.S. dollar strengthened against most other currencies and in particular the South African rand.

Our freight forwarding segment was negatively impacted by these macro economic forces, primarily because of the weak airfreight environment. Since the third quarter of last year airfreights been disproportionately affected as clients continue to ship in smaller quantities and increasingly favor ocean freight is the cheaper mode of transit.

Tonnage has declined significantly in the key east/west trade lanes, but less so in the intra-Asia lanes and those evolving the Middle East and Latin America. Our overall freight volumes in the fiscal 2013 second quarter declined at a slightly lesser rate than in the first quarter as comparisons to last year became easier.

In contrast, ocean freight volumes have grown modest all year. Our ocean freight TEUs increased in the second quarter at about the same rate of growth seen in the first quarter.

Net revenue per unit of freight forwarding was challenged by currency and higher ocean carrier rates. Ocean rates have risen significantly this year and had stayed at elevated levels, especially on trans-Pacific lanes. This had a detrimental effect on net revenue per TEU in the quarter.

We continue to have constructive dialogs with our carrier partners and clients to manage the impact of these higher rates, but the typical lag affect had a negative impact on the second quarter. Lawrence will review these details in a moment.

Operating expenses in freight forwarding declined less than net revenue as operating costs are more closely tied to shipments rather than tonnage or TEUs. As a result, productivity levels fell in the second quarter compared to the same period last year. While we don’t control external factors, we do remain vigilant in controlling costs and driving increased sales.

Contract Logistics and Distribution was again the more consistent segment with revenues and net revenues slightly higher on a year-over-year basis when adjusted for currency. However, revenue performance varied by region.

In the Americas and EMENA macro economic forces led to lower volumes and less new business. Our operations in Africa and Asia-Pacific on the other hand, continued to grow in local currencies with new business and higher client activity relative to the second quarter last year.

Our Contract Logistics and Distribution teams have continued to do a good job controlling costs, while improving marginal businesses and underperforming client contracts. As you can see, this led to an increase in operating income and margin for that segment in the second quarter, in spite of slowing economies and currency headwinds.

I’ll now ask Lawrence to walk through the financial results. Lawrence?

Lawrence Samuels

Thank you, Eric. Net income attributable to common shareholders in the fiscal 2013 second quarter was $0.18 per diluted share. Excluding severance costs, adjusted net income was $0.20 per diluted share in the fiscal 2013 second quarter, compared to $0.24 per diluted share recorded in the same period last year.

Currency changes had a bigger impact on our second quarter results than we have seen in recent quarters. The U.S. dollar strengthened against most currencies, particularly against the South African rand. This had a significant effect on reported revenues and expenses in the second quarter.

The weaker rand also had a larger impact on the bottom line, reducing operating income by $4.7 million and net income by approximately $0.03 per diluted share in the second quarter.

As we told you previously, the weakening of the rand began late in the third quarter of last year and it is likely to be effect in our comparative result through at least the third quarter of this year.

Revenues and net revenues decreased 10.9% and 8.4%, respectively, in the fiscal 2013 second quarter, compared to the same period last year. The decrease in revenues reflect the impact of currency and the weaker airfreight environment, partially offset by greater activity in Contract Logistics and Distribution in Asia, Pacific and Africa.

On an organic basis, revenues declined 3.3%, while net revenues rose 0.7% compared to the same period last year.

As noted earlier, we incurred severance costs of $2.1 million in the second quarter of fiscal 2013, compared to $3.5 million in the same period last year.

We have provided reconciliations of GAAP to non-GAAP results in the tables in today’s press release and posted more details on our website. The rest of my remarks will refer to our results as adjusted to exclude these severance costs.

Adjusted operating expenses in the fiscal 2013 second quarter were 7.3% lower than the same period last year. The impact of currency reduced reported expenses significantly in the fiscal 2013 second quarter.

On an organic basis, adjusted operating expenses would have been 1.7% higher than the same period last year. Our adjusted operating margin in the fiscal 2013 second quarter was 8.7%, compared to 9.7% in the second quarter last year.

Revenues from freight forwarding segments were down 14.6%, primarily due to currency effects and an 11% decline in airfreight tonnage shipped during the second quarter. Airfreight tonnage improved slightly on a sequential basis during the second quarter, increasing 4% over the first quarter.

The month of July was down 8% compared to the same month last year as comparisons eased. Tonnage in August was down in the mid single-digit range compared to last year, a modest improvement over July.

Ocean freight TEUs were up 2.5% in the quarter continuing the modest growth seen this year. The month of July was up 3% compared to the same month last year. Ocean freight volumes in August were similar to last year.

Net revenues in freight forwarding decreased 9.8% in the fiscal 2013 second quarter, primarily due to currency effects and the airfreight tonnage decline. Net revenue per kilo declined 6%, while net revenue per TEU fell 7% in the second quarter compared to the same period last year, primarily due to currency effects.

Adjusting for currency, net revenue per kilo was up 2% and net revenue per TEU increased 1%, compared to the second quarter last year. Compared to the first quarter net revenue per TEU was down 8%, while net revenue per kilo increased 1%.

Adjusted operating profit in freight forwarding decreased 18% in the fiscal 2013 second quarter compared to the same period last year. The freight forwarding adjusted operating margin in the second quarter was 15.9%, compared to 17.4% a year ago. The decline in profit and margin was primarily due to the lower airfreight volumes, which were partially offset by the higher ocean freight volumes.

Contract Logistics and Distribution revenues and net revenues decreased 2.5% and 7.2%, respectively, over the same period a year ago, primarily due to currency. On an organic basis, revenues increased 5.3% and net revenues rose 3.1% over the same period last year.

As Eric mentioned activity was higher in our Africa and Asia-Pacific regions, partially offset by decreased business in the Americas and EMENA.

Adjusted operating profit in Contract Logistics and Distribution increased 2.8% in the second quarter of fiscal 2013 compared to the same period last year. The adjusted operating margin in Contract Logistics and Distribution was 9.1% in the second quarter, compared to 8.2% reported in the second quarter last year.

The increases in profitability and margin primarily reflect greater client activity and ongoing improvements in operations offset by currency. Our effective tax rate was 33% in the second quarter of fiscal 2013. We continue to expect that our effective tax rate for the full fiscal year will be in the region of 32%.

With that, I’ll turn the call back to Eric for closing remarks. Eric?

Eric Kirchner

Thank you, Lawrence. Clearly external environment remains challenging, most economies are slowing and some are already in recession. The uncertain atmosphere has led many companies to reduce their production, which impacts their level of spending on freight and logistics.

Air freight continues to lag behind other modes. It was encouraging to see some sequential improvement but the freight remark -- freight market remains weak and we see no signs of peak season this year.

Ocean freight’s been steadier which is encouraging. Clients continue to prefer this mode for now, but we’re seeing no signs of peak in ocean freight either.

Contract Logistics and Distribution has remained stable with topline growth in local currencies and bottom line improvement. As we’ve noted before, this business faces some headwinds as well with slowing economies and reduced spending.

You all know by now that ocean carrier rates have risen materially this year and so far these rates have remained at elevated levels. Even though supply is expected to outstrip demand for the foreseeable future, rates may remain high as carriers seek to restore and maintain profitability. It remains to be seen how long these higher rate increases can be sustained, but we still could see some pressure on net revenue per TEU in the near-term.

Airfreight rates are less of a concern, but the industry may experience a short-term spike in the fall with several tech product launches expected. As always, we plan to manage this environment through our targeted growth strategies, pricing initiatives and productivity measures like better buying and increased use of gateways, while tightly controlling costs.

Our transformation efforts continue to make progress. We launched the pilot in the Netherlands and key lessons learned there are being integrated into our deployment planning. You’ll recall that we’re engaged in a comprehensive business process transformation, not simply an IT project.

We’ve been training our global operating process and global finance teams in the Netherlands in preparation for subsequent deployment and building on the experience of streamlining operations while improving system performance and functionality. All projects of this size and scope result in fine tuning as they evolve.

We identified the opportunity to advance deployment of the finance system and process changes, ahead of next steps in the freight forwarding operating system rollout. We implemented the finance changes in six countries and the system is up and running.

This gives us the option of continuing the finance system and process changes either in conjunction with or independent of the freight forwarding operating system. We also continue to make strides in our procurement strategies, gateway initiatives and product updates. We remain on track to achieve the long-term operating margin goals that we disclosed at our Investor Day.

With that, I’ll turn the call back to Jeff to direct the Q&A period. Jeff?

Jeff Misakian

Thank you, Eric. We will now open up the call for your questions. As a reminder, we ask that you limit your questions to one initially to allow as many as possible to have an opportunity to participate. Irene, may we have the first question please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Ben Hartford with Robert W. Baird. Please go ahead.

Ben Hartford - Robert W. Baird

Hey. Good morning, guys. Eric, could you provide a little bit more context in terms of your outlook September and October? You had talked about some potential for airfreight rates to rise in upcoming weeks and months given some of these product rollouts, but no signs of a peak. Broadly, it sounds like there is some mixed bags. You have these product launches in September and October that will help. But then you kind of fall back into the weakness from November until February, so can you provide a little bit more context in terms of what you’re seeing over the next three to six months?

Eric Kirchner

Sure. We don’t handle a lot of this high-tech business. So it probably won’t affect us in terms of an uptick in our volumes. We’re focused is ensuring that we have adequate capacity for our existing client base and we’re confident that we have got that covered.

We learned through some contacts that there are estimated to be over 70 charters already booked or committed for some of that high-tech activity. So that would tend to indicate that with that much additional capacity, specifically targeted toward those launches coming into the market, I think that’s supposed to happen over about a six week period. The commercial capacity, while it will obviously be consumed to some extent in limited markets by this tech launches, still is probably adequate to cover the general market need.

So with respect to a six month forward look, what we’re trying to do is just make sure that we focus on maintaining our costs on the operating side and then being prepared to react to any opportunities on -- this is more specifically toward airfreight. And we will react to any opportunities to gain new business.

So, we’re focused at targeted, but responsible business acquisition in this timeframe. I don’t expect to have a lot of tailwind from general market or macro economic conditions. And we’re just preparing to operate the business without the assumption of any peak season either in air or ocean.

Ben Hartford - Robert W Baird

If I can ask a follow-on just on that point, talking about the relationship between airfreight rates and ocean freight rates, that gap has narrowed meaningfully over the past six months given what ocean freight rates have done and air freight rates have been flat to down.

So you talked a lot about this trade down from air to ocean. You’ve seen that over the past 12 to 24 months. Does the narrowing of the gap between air freight rates and ocean freight rates slow the pace of that trade down moving forward. How are customers thinking about that relationship?

Eric Kirchner

The other -- the third factor in that, Ben, would be cost of capital. So, I think that the other thing we’ve seen is certain customers that would not normally consider ocean as an option because of the extended transit time. Even if they’re able to save less in an ocean versus air comparison then they might have in the past, they are still able to save something. And if they’re able to do that and still operate their supply chains effectively, we would expect that to happen.

So the commoditization of the transportation spend has been the challenging thing to deal with because again, you have to balance. The client has to balance out and trade-off service for price. We’ve had some interesting examples, recently four or five in fact where we had some business. We lost that business due to a lower bid by a competitor and then that business has come back to us because the service that was delivered by the competitor at the lower price was not adequate to meet the clients’ need.

So we are trying to be balanced and take the prudent approach to be as aggressive as we can on the price side so that we are able to offer value to the customer base. But not go to the extent that we can’t deliver on the service commitment that we give to our client.

So, I don’t sense that even though the gaps narrowed between air and ocean to some degree that that would slow the trade down, if the service and transit time commitments that can be delivered by ocean are adequate to meet the clients’ needs.

Ben Hartford - Robert W Baird

Okay. Great. Thanks for the time.

Eric Kirchner

Okay.

Operator

Thank you. Our next question comes from the line of William Greene with Morgan Stanley. Please go ahead.

William Greene - Morgan Stanley

Yeah. Hi. Good morning. Eric, I’ve heard you sort of opine on this in the past, but I’m just kind of curious if you have any color on the disconnect between what seems to be going on with some of the forwarder trends on air and the broader market trends. When you look at metrics like IATA and what not, we don’t see the kind of trends that you are showing.

And so I don’t know where the -- it is just the markets that you are in are underperforming or is it that the customers that you have are losing share or something because it -- or maybe it’s the integrators are taking a lot of share. But I just - I don’t see why there’s such a large disconnect?

Eric Kirchner

We’ve been curious as well in terms of the divergence between many of our key competitors reported results and then and what the IATA’s numbers shows. So, we don’t have anything that’s conclusive at this point. We actually did reach out to IATA directly to better understand the composition of their numbers. But we were towards the low end of the peer group with regard to volume changes in airfreight, part of it probably relates to the trade lanes we’re in.

One of our key competitors, I think was down a little bit more than us and they’re more heavily weighted to export from China or export from Asia. So there is a trade lane effect and we still have not gotten a really good feel for why the IATA numbers don’t seem to be tracking along with the competitors that we normally compare ourselves against. The correlation’s not as tight as it was for many years. So I don’t have a good answer.

I think, many of the -- if not all the integrated numbers are in IATA’s numbers. So the only thing that could imply would be that there’s more freight moving on integrators aircraft and packages, that’s one possible conclusion or another conclusion is perishables, which we don’t -- most of the forwarders don’t get heavily involved in perishables that fly, maybe hasn’t being more volume produced flying on IATA carriers but we don’t have a good answer.

William Greene - Morgan Stanley

Okay. Just on, one quick clarification on ocean. The yield -- sorry, the gross margins haven’t moved that much year-over-year in the first half of the fiscal year, but the rates have gone up a lot. Does that mean if rates come down, you wouldn’t actually get an expansion in the margin, just because of the way you manage it?

Lawrence Samuels

We’ve tried to -- obviously our clients expect us to make a margin but they expect us to make a margin. And then it helps them manage their supply chains and reflect what the market rates are. So there is just the peer effect of the math that if we maintain the same absolute margins and the rates come down.

I’m sorry, the same absolute net revenue per TEU and the rates come down and the margins go up. But I think that we try to be as transparent as possible and make sure that we obviously reflect the current market conditions.

William Greene - Morgan Stanley

Okay. Well, thank you.

Lawrence Samuels

Sure.

Operator

Thank you. Our next question comes from the line of Ed Wolfe with Wolfe Trahan. Please go ahead.

Ed Wolfe - Wolfe Trahan

Thanks. Hey. Good morning, guys.

Eric Kirchner

Good morning.

Ed Wolfe - Wolfe Trahan

Can you give a little bit of background on, first of all the severance cost and ongoing, why there were ongoing severance costs and how long those are going to go on for? And then just an update generally on the timing of some of the rollouts of the transformation costs, that would be my first question?

Lawrence Samuels

In terms of the severance costs, it’s predominantly linked to the roll out. As Eric mentioned, we deployed the financial system in a number of countries and what that enabled us to do is to move those, that transaction processing to the shared service centers.

And so we then begin to release the finance people in those countries. But obviously we can only do that as and when the deployment happens. So and I think we mentioned this at the Investor Day that we would expect the severance cost to continue during the whole rollout period just because of the nature of the deployment over a period of time.

Eric Kirchner

And then with respect to the rollout itself, when you do a project of this sort, we have to tune up the teams that are charged with the deployment. So we’ve got teams that will be in each region working on deployments as appropriate and those teams that have been on the ground in Netherlands to observe how the operations have been affected by the installation of the new system.

As we put the system in the Netherlands, we’ve had learnings about how to most effectively deal with subsequent countries in terms of the workflow and the process standardization and the issues that we’ve been talking about.

If you consider what we did in the run-up to deploy or to the pilot in the Netherlands, we embarked on a process that was about 18 months long to identify best practice in the field operations across the region. And then adopted one best practice for UTI method and then we rolled those out on a process-by-process basis to our field operations.

So, we deployed those things through a learning management system. We had a training process. We ordered it to make sure that the process changes had occurred. What you can’t do in a remote environment such as I just described is, really focus on an industrial engineering sort of approach in terms of workflow within an individual operation.

So that’s why we had all of the teams on the ground in the Netherlands to learn from the deployment there. And we’re now looking at the appropriate next countries to go to and preparing these teams to get out and move quickly through the deployment process.

So the other learning that we had today is the fact that we could de-couple the Oracle and the finance process changes from the freight forwarding operating system deployment and doing so allows us to take advantage of again process standardization and shifting more work as Lawrence mentioned from country level finance to a shared service environment.

Though shared service environments are up and running in Johannesburg, in Portland, and in the Philippines. And we will be able to continue with that Oracle deployment and that I think backup with the freight forwarding operating system deployment consistent with what we talked about in Investor Day. And we still are on track to produce the results and the run rate that we talked about by the fourth quarter of this coming year going into 2015.

Ed Wolfe - Wolfe Trahan

Eric, that’s very helpful and taking us through that put some meat on the bones. Just to be clear that roughly $2 million to $3 million a quarter of severance costs, you’ve been suffering, you expect that to go through fiscal ‘16 then at this point?

Eric Kirchner

Probably, it will start selling off, clearly as the deployment picks up speed, we’ll probably see that increase slightly but would begin to tail off as we start deploying in the last two countries.

Ed Wolfe - Wolfe Trahan

So goes up a little from here and then comes back down from here a little bit, I think over the next…

Eric Kirchner

So I would see through fiscal ‘14 probably a slight increase and then beginning to tail off through fiscal ‘15.

Ed Wolfe - Wolfe Trahan

Then as a second question not related to this. Lawrence, can you talk a little bit about the cash flow. This is the second quarter in a row where working capital is working against you and you are using some cash and it feels like with the revenue less maybe that’s something that should be going the other way. Is any of this had to do with the rollout or how should we think about cash flow and working capital going forward?

Lawrence Samuels

I think, it does fluctuate partly on timing as well. If I look back couple of quarters, second quarter of fiscal ‘11, we had the same impact but some of it does relate to the transformation costs. But the large amount is really just related to timing of collections on receivable.

As you know, receivables are running in the low city day range and continues to be in that region. And so I think, I’ll put it down mainly to just timing of those collections. There is certainly no change in the trends or anything like that.

Ed Wolfe - Wolfe Trahan

So, no change for the year, how you would expect cash flow in terms of risk?

Lawrence Samuels

No, no. As always, we would expect the strongest free cash flow to come in our fourth quarter.

Ed Wolfe - Wolfe Trahan

Okay. Thanks guys.

Eric Kirchner

Thanks, Ed.

Operator

Our next question comes from the line of Peter Nesvold with Jefferies & Company. Please go ahead.

Peter Nesvold - Jefferies & Company

Any perspective, we can offer on the ILA contract expirations at the end of September, are you seeing any kind of ship preparations for that and in the event that there is a strike, how do you anticipate that possibly impacting your business?

Eric Kirchner

We’re prepared. We’ve been working with our clients to discuss alternatives. It’s really hard to say whether or not there’s going to be a strike but I think it would be imprudent for us not to be prepared for it. So likely outcome, we’ve seen some clients already shift some volumes so that they don’t have freight on the water that would be impacted in East Coast port.

It’s unfortunate because, if you bring it into the West Coast then there is additional cost to get it across the country as impacted destinations is in the east. But our speculation is there is a possibility of the strike. It wouldn’t likely last a long time but we are working and again we’ve got contingency plans by client whether that’s ensuring that we’ve got some additional capacity on the air side, if necessary and considering that we would assist those clients in routing ocean volumes to other ports so that they don’t get hung up in it.

So, it’s really hard to say whether that would produce much of a change in airfreight volumes because again the demand is lower in airfreight today than it was if you compare it back to the West Coast strike in the early 2000. So, the wild card in this is, I guess, the timing of it and if it coincides with the Tech launch and you were looking at origins that are affected by both the East Coast destination and the airfreight from the Tech launch is that would put some strain on air capacity and that’s an example.

But again we’ve done some scenario planning and we’ve worked directly with our clients and carrier partners. And we feel that we are in a good position to protect the service for them.

Peter Nesvold - Jefferies & Company

So if I play that back, it sounds like you are seeing some freight diversion over the West Coast in preparation for that. And you’re seeing contingency plans being laid to possibly divert some to air, none of that is occurring yet and that the biggest potential constraining factors are the Tech launches in the second half which could overwhelm some capacity in the air?

Eric Kirchner

Yeah. If the strike was concurrent with -- if the port strike was concurrent with the Tech launch and a client needed air capacity that was then consumed because of the Tech launch, it would create some challenges.

Peter Nesvold - Jefferies & Company

Okay. And then the follow-up question, I know we’ve spent a decent amount of time already on the call talking about IATA and how the data isn’t exactly lining up with what you are seeing in the air. I’m curious at least directionally, I mean, when I saw the IATA data I saw a double-dip in July. And I’m just curious, directionally, did you see similar type double-dip in July versus what you saw in the prior two months and how did it carryover into the current quarter? Thank you.

Eric Kirchner

Sure. There’s not been a lot to ride home about with regard to the air volumes. I would say that there are volumes in July with the best months in the quarter considering two factors and the first being that the declines were much -- or larger at the beginning and then the fact that the comparisons are now beginning to ease versus last year.

So, we -- and then August appears to be slightly better than July with regard to the year-over-year declines. So the trend is narrowing but again it’s narrowing partially because of the lower base in the prior year and not as much as absolute growth in the current timeframe.

We’re focused and as I talked through the dynamic of the competitive environment, we don’t want to go out and simply take volume for volume’s sake. And at the same time, we don’t want to price in a way that causes the erosion of current volume so that we have -- that we don’t meet our commitments from a procurement standpoint with our carrier partners.

So, we’re being mindful of both ends of that equation and candidly, I want to make sure that we’re focused equally on growth and cost control because we need more growth against the market and we’re focused on that.

Peter Nesvold - Jefferies & Company

Great. Thank you.

Jeff Misakian

And just a reminder, if everyone could limit their questions to one please, so we can allow everyone to get through it.

Operator

Our next question comes from the line of Tom Wadewitz with J.P. Morgan. Please go ahead.

Alex Johnson - J.P. Morgan

Good morning. It’s Alex Johnson on for Tom this morning and I’ll limit my questions to one.

Jeff Misakian

Thank you, Alex.

Alex Johnson - J.P. Morgan

You’re welcome. Just wanted to ask you about the difference in, I guess, growth in activity and contract logistics in Africa and Asia-Pacific versus Americas and EMENA. Can you give us a sense for what the variance in the growth in activity in the different regions is and maybe any thoughts on whether you’re seeing Americas and EMENA activity sort of pull Asia-Pacific lower, any change in that?

Ed Feitzinger

Alex, this is Ed Feitzinger. So, the latter part of your question about pulling, can you repeat that part?

Alex Johnson - J.P. Morgan

Well, just are you seeing any of the decrease in activity in Americas and EMENA, is that translating in any different way in more recent months in Asia-Pacific than it was earlier in the year?

Ed Feitzinger

No. I mean, if you look at our -- what we’ve been talking about, what we’re driving on here, Africa is our most mature and really our model for where we’re growing as a business. What you’re seeing in the growth story in Africa is really around the integration of our business lines, our abilities to sell together and we’ve been unifying our product there for three or four years now. That’s something that we’re working on EMENA that we’re working on in the Americas, which are larger units than Asia as an example.

Asia is a pure growth story. We are quite small there as you are aware and we are just getting good growth, very good traction with customers in certain focus markets in Asia. When you look at the Americas and EMENA, EMENA is a macro story in some ways but we have had a number of unprofitable facilities, multi-client facilities that we’ve closed over the course of the last year.

And we’ve had a number of unprofitable contracts that we’ve exited from as well. So when you look at the top line growth in EMENA really that story is our focus there has been on improving the operating income. And I’d like to see a couple of more quarters under our belt there but we are getting close to maybe able to say we have turned the corner there.

We are optimistic about the improvement that we’ve seen in EMENA after really a couple of tough years. So you’ve heard us talk about EMENA in the past is not one of our better performing regions. And I think this is the first quarter where you’ll hear me say that we are proud of what the EMENA team contributed last quarter from the R&D perspective.

On the Americas, there is some customer, there are client volume mix that are very unique to certain customers. Distribution volume softened slightly but not a major issue there. And then we are really focusing on higher margin business and integrating our acquisitions and charging forward there.

Alex Johnson - J.P. Morgan

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jack Atkins with Stephens. Please go ahead.

Connor Hustava - Stephens

Hi guys. This is actually Connor Hustava on for Jack. Just wanted to get back to the ocean if we could. We saw lot of your competitors experience some net revenue margin contraction due to the higher carrier rates both sequentially and year-over-year.

However your ocean margins were relatively stable despite seeing the same increases. So I’m just hoping if you guys could give me some help just kind of reconciling that difference?

Lawrence Samuels

I think Connor, it’s partly related to our ongoing strategy with our procurements and negotiations with the carriers. As you know, most of those negotiations take place in May and really the focus has been on, as you recall towards the end of last year, we’ve brought on a specialist ocean product leader. And I think we’re just seeing the benefits of some of those initiatives come through in the yields remaining reasonably consistent.

Eric Kirchner

We had talked about the consolidation of volumes. We’ve been talking about it for quite a while on the airfreight side and that same activity had not occurred until more recently on the ocean freight side. So, we had I think really diluted our buying power, our procurement power by utilizing too many carriers and spending those volumes out.

So, we have had meaningful progress with a smaller number of carriers and as Lawrence mentioned, that’s a mitigating factor to the current pricing environment because we’re able to take advantage of some volume commitments by tendering more volume to specific carriers in exchange for some better pricing opportunities with those carriers.

Connor Hustava - Stephens

Makes sense. Thanks a lot for the help.

Eric Kirchner

You bet, sir.

Operator

Our next question comes from the line of David Ross with Stifel Nicolaus. Please go ahead.

David Ross - Stifel Nicolaus

Good morning gentlemen.

Eric Kirchner

Good morning.

Lawrence Samuels

Good morning.

David Ross - Stifel Nicolaus

Airfreight tonnage in the quarter was down 11% year-over-year. Can you comment on what shipment count did?

Lawrence Samuels

Sure. Just getting some details. Year-over-year shipping count was down about 4%, but did increase sequentially by about the same amount over our first quarter.

Eric Kirchner

So, that’s what we mentioned earlier in the remarks that, that creates a challenge with regard to the revenue that airfreight transactions produced versus the extent to handle the transactions when you compare it against the volume decline. So you’ve got -- you have and this is a generality, but you have a lower rate for shipment -- decline in shipments is less than the decline in kilos and the size of the shipment has certainly big influence on the net revenue per shipment, but the cost to process a shipment are similar regardless of its size, right.

So the operating expense associated with it is more consistent than any variance or fluctuation in the net revenue per shipment. So consequently, you need to have the headcount to process the shipment and when they don’t decline as quickly as the tonnage does, it create some challenges.

David Ross - Stifel Nicolaus

I know it’s tricky because it’s a weight based pricing system. But is there anything that you guys have figured out to do to compensate for customers basically shipping smaller items and may have the same or greater dollar value to keep that yield?

Eric Kirchner

The industry for many years have had some late break pricing differential, but that would imply a big change. So as an example you might charge more proportionately for our shipment. Its less than 100 kilos, but our average is about between 480 and 500.

So, if that moves up or down 10%. You’re still in the same range with regards to the rate per kilo that you would charge to customer. So, we haven’t found a magic formula to help us out in that respect at this point.

David Ross - Stifel Nicolaus

Thank you. Very helpful.

Eric Kirchner

Sure.

Lawrence Samuels

Thanks, Dave.

Operator

Our next question comes from the line of Nate Brochmann with William Blair & Company. Please go ahead.

Nate Brochmann - William Blair & Company

Good morning, everyone.

Eric Kirchner

Hey, Nate.

Lawrence Samuels

Hi, Nate.

Nate Brochmann - William Blair & Company

I wanted to talk a little bit. Eric, you commented obviously, you saw some uptick in terms of volumes within Intra-Asia. Could you talk a little bit about kind of either what’s, one going on macro there. Two, what you guys are specifically doing. And then three, where you see that long-term opportunity in terms of where you’re making investments and how you see that accelerating maybe over the next three to five years?

Eric Kirchner

Sure, Nate. We’re -- we have an interesting weekend coming up because we’re meeting with our Board to talk about the next iteration or the extension of our strategy. And we’ve done quite a bit of work -- trying to examine emerging market. And then really looking at how we’ll focus our investments in our both in human resources and in footprint and some of the emerging market economies.

The trade within Asia does appear to be high on the list, growth opportunities into the future. So again, we’re going to be very focused as we go forward. And I think if it’s much more helpful than our past practice which involves each region assessing growth or market opportunities and acting upon those opportunities not quite independently as a whole but in a more isolated way.

So, what we’re focused on is getting the entire company targeted around specific opportunities as you mentioned. And then making sure that everybody is on the same page and flowing in the same direction to make those investment successful.

We’ve got a finite amount of investment capital in the company and we are going to target it very specifically so that we get the maximum return for the future and Intra-Asia, does pose some interesting opportunities for us. But as I said, we are going to look through the context that the whole and make sure that that we are applying our attention in areas where we can be more successful.

Nate Brochmann - William Blair & Company

And that’s created here to throughout all this transformation that you have kind of in the investment by region kind of coming together, but could you talk a little bit more in terms of like the specific drivers today and in the future in terms of what’s driving that opportunity to make it look attractive?

Eric Kirchner

Sure. You can you apply the term density in a couple of different ways. But in ad business, as an example, if we open up a location for our client in a specific market, it becomes helpful for us to have additional locations in that specific market, because it gives us leverage across various functions that can help those clients in one spot more or less.

So, if you’ve got three or four operations in a country or a city then the oversight of those locations can be handled with a single team as opposed to one shopping in one country. So we’re looking at density in that way -- market density and then also in trade lanes density on the freight forwarding side, because if we’ve got focused efforts on both ends of the transaction then we’ve seen much greater success in developing that lane density, which drives better procurement, which drives better mix on those lanes and then lowering our effective our achieved cost.

If you put those two things together, if you have a trade lane focus on the forwarding side and we’ve generated sufficient market density, because we have freight forwarding and multiple CL&D locations in a country, then it starts to really gain leverage there.

So those are the kinds of things that we’re integrating into this new -- this next iteration of our strategy. And again, it’s going to involve more specific targeted focus in order to allow us to be more successful in the market that we’ve identified as high growth potential over the next five years.

Operator

Question comes from the line of David Campbell with Thompson Davis & Company. Please go ahead.

David Campbell - Thompson Davis & Company

Yeah. Hi, Eric. As well as the net of -- there’s a lot of talk about how European countries are one-by-one going into recessions. That is their business is down from previous months this year. And yet, if you look at the airfreight data from European Associations you see the tonnage increases from April and May to June and July and now in August. Can you explain that difference between what is summarized as recession and airfreight growth?

Eric Kirchner

I don’t have a great answer David, other than the fact that those markets were hit harder earlier and maybe the year-over-year comparison are less challenging for those markets, because they were so far down last year. That’s one speculation. I don’t have any specifics though in terms of the fact that there’s been any material improvement certainly with our customer base there.

David Campbell - Thompson Davis & Company

So, you haven’t seen any improvement in -- not the year-to-year change necessarily, but the sequential…

Eric Kirchner

There’s been a little bit of uptick with automotive clients, because that industry seems to have bucked the trend a little bit. So our automotive is up a little bit, but not a lot for us.

David Campbell - Thompson Davis & Company

Okay. Thank you.

Eric Kirchner

Thank you.

Operator

Our next question comes from the line of Kevin Sterling with BB&T Capital Markets. Please go ahead.

Kevin Sterling - BB&T Capital Markets

Hi. Thank you. Good morning, gentlemen.

Eric Kirchner

Good morning.

Kevin Sterling - BB&T Capital Markets

Eric, you mentioned earlier that about 70 charters have been booked for high-tech launches. Could you help me put into context kind of maybe a "normal market" without a surge of High-Tech launches what the charter market might look like? And then how this so much capacity seemingly booked impact how you plan to buy air capacity in the back half of this year?

Eric Kirchner

Absent this tech activity, we -- I would -- we would have -- we would see or the market would see very little growth or perhaps getting back to last year’s levels at best. Because again the comparisons are easing as we go through the remainder of the year. I think that if you were to generalize, there have been declines for almost 13, 14 months consecutively if you look at year-over-year.

So without the high-tech activity associated with these launches, it wouldn’t be very robust. With regard to charter activity if I understand the question, again absent that tech scenario, I would not have predicted much of many.

Because again, it really occurs around a peak season or a point where capacity is all consumed and absent some big other breakout products for the holidays, which we are also close to holidays right now. I don’t think that there would have been much charter activity at all.

Kevin Sterling - BB&T Capital Markets

Right. Okay. And how does that -- how are you guys thinking about bond capacity with the seemly charter activity looming on the horizon. How are you think about buying capacity in the back half of this market, how does that impact your decisions?

Eric Kirchner

We’ve had ongoing. We have ongoing relationships with carrier partners, who have capacity positioned in the market. There has been the emergence of some new competitors from the asset operating size specifically a lot of the carrier space in the Middle East.

So at this stage, there is adequate capacity and in the context to these product launches we have a combination and it’s at a much lower percentage than it has been in past years, but we’ve got a combination of block their committed space and then space that we will take on the market.

And the regular clients that we service are protected by this -- largely by this blocked space capacity. And they understand that while we’ll have access to capacity in excess of that, that it might come at a different price based on market rates that would be driven by the overall demand out of anyone of these origins.

So, we’re -- we have a -- we evolved the process over several years with Diane Bennett in Procurement, now Jerry Trimarco responsible for the air product and then a group and extended group the global airfreight team. So, we’ve got representatives from each region that communicate on an ongoing basis, meet quarterly, meet directly with our carrier partners. And this issue has been on the table and visible in that form for quite a while to make sure that we’ve got coverage for our client base.

Kevin Sterling - BB&T Capital Markets

Got you. Well, Thanks so much your clarification. I really appreciate the time.

Eric Kirchner

So, thank you, Kevin.

Operator

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Todd Fowler - KeyBanc Capital Markets

Hi, great. Thanks. Good morning. Thanks for taking my question. I apologize I got on a little bit late, so I hope this hasn’t been covered. But I wanted to make sure that I understand the impact of the transformation on the financials in the second half of the year. I have gotten my notes that the incremental depreciation, the $20 million annually should start to hit someway midway through fiscal 2013.

So, I wanted to see if you had a depreciation number for the full year for the third and fourth quarter? And then also I think you mentioned in your earlier question, there should be some cost benefit coming through in the fourth quarter, what that would be and so as we get into the fourth quarter is the net benefit with the depreciation has been bit of -- do you lose some of that in the third quarter, because of the depreciation coming in without the cost benefit?

Lawrence Samuels

Todd, I think from the Investor Day, we anticipated that for fiscal ‘13, the additional costs and benefits would probably neutralize themselves. So that proving the anticipation as to when the depreciation will start that is the dependent on the accounting rules and the functionality of the system. So from your model point of view, I would still continue to assume that cost and benefits rules will negate each other through fiscal ‘13, as we expected for the remainder of this year.

Todd Fowler - KeyBanc Capital Markets

Okay. So, I guess to make sure I understand that Lawrence I mean some depreciation this year, I guess you have -- do you have a depreciation number that we can use for modeling purposes?

Lawrence Samuels

We haven’t disclosed that it in terms of the fiscal year, Todd.

Todd Fowler - KeyBanc Capital Markets

Okay. And then just, I guess so I’m clear the comments about you’re seeing the cost benefits in the fourth quarter, it seems like that should be offset maybe by the depreciation coming online that the timing of those two would coincide with each other?

Lawrence Samuels

They would come at similar times, yeah.

Todd Fowler - KeyBanc Capital Markets

Okay. And then so if I think about the fourth quarter versus the third quarter on a sequential basis, if there’s normal seasonality in the fourth quarter’s down from the third quarter on, however many pennies per share it averages really the fourth quarter this year shouldn’t be too much different from that even though you’ve got some of the benefits of the transformation coming in on the second half of the year?

Eric Kirchner

I think the wild card is going to be what volumes do. So, with regard to our general performance for the quarter -- satisfy and well -- this tech things going to be mostly in the third quarter. But it’s really going to be depended on how the economies perform and the success of our business acquisition initiatives between now and the end of the fiscal years. So, it’s still very uncertain as we move through the third and into the fourth.

Todd Fowler - KeyBanc Capital Markets

I should know. And I guess, I mean that make sense I mean so, I guess what I’m asking is of things being equal and kind of normal seasonality, I guess for whatever that means third quarter versus fourth quarter. What we should be thinking about is not seeing a significant benefit from the transformation here in the fourth quarter this year relative to the run rates in the third quarter maybe it feels like it’s more of a fiscal ‘14 event than from a financial statement standpoint?

Lawrence Samuels

Yeah. I think that’s fair. Yeah.

Todd Fowler - KeyBanc Capital Markets

Okay. Good. Now, that’s helps. I appreciate the time.

Lawrence Samuels

Okay.

Operator

And I’m showing no further questions at this time. I would like to turn the call back to management for any closing remarks.

Jeff Misakian

Okay. Thank you, Irene. And thanks everyone for joining us today. As we’ve reached the top of the hour. We’d just like to thank you all of for participating this morning and thanks for your continued interest in UTi and your ongoing support. Have a great day.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. And you may now disconnect.

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